Does Your Credit Score Drop After You Purchase a Home?
Purchasing a home has no impact on your credit score. However, if you finance a home, rather than buying it with cash, then your new home loan does have an impact on your credit score. New loans usually have a negative impact on your credit score but other factors can offset this impact, and over the long run, a mortgage can actually improve your credit score.
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Risk
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Lenders equate new credit applications with risk because you are asking a third party to finance something that you lack the cash to buy. The more you apply for credit, the more lenders and credit rating agencies view you as a risky borrower and your credit score drops to reflect this perceived level of risk. Likewise, when you take on a new debt, your credit score drops because the more debt you take on, the more likely you are to have problems managing your bills. However, while applying for a new loan and establishing a new credit line can cause your score to drop, this drop usually only amounts to a few points.
History
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When you first establish credit, from a lender's perspective you are an unknown quantity and therefore people with limited credit history tend to have low credit scores. Over the course of time, your credit score improves as you prove that you can handle your credit accounts and pay your bills on time. Credit agencies like continuity, so your credit score partly depends on your average length of account history. When you take on a new loan, your average length of account history drops and this also causes your credit score to drop by a few points.
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Diversity
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Credit accounts come in many forms, and while some people have no problem making minimum payments on interest-only credit cards, they run into trouble making large principal and interest payments or home loans. The type of credit you use accounts for approximately 10 percent of your credit score. Credit agencies give you higher scores if you utilize diverse types of credit rather than just using one type of account. If you have not previously had a mortgage, then a new home loan actually improves your credit score because it adds some variety to your credit report. This small gain may offset the damage done to your credit score by taking on the new loan.
Considerations
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Your mortgage probably represents your largest debt and the interest rate that you pay on your mortgage depends in part on your credit score. While your mortgage can cause your credit score to change, your credit score prior to your mortgage has more of an impact on your financial well-being than your post-mortgage score. Your interest rate does not change after you get your mortgage just because your credit score drops by a few points. Therefore, pay down your revolving debt to improve your credit score before you apply for your mortgage. Thereafter, pay your mortgage on time and you should see your score start to rise.
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